World Trade Organization: U.S. Companies' Views on China's	 
Implementation of Its Commitments (24-MAR-04, GAO-04-508).	 
                                                                 
As the second largest source of foreign direct investment in	 
China, U.S. companies continue their keen interest in China's	 
implementation of its World Trade Organization (WTO) commitments.
China's 2001 WTO commitments include specific pledges to increase
market access, liberalize foreign investment, continue		 
fundamental market reforms, and improve the rule of law. In 2002,
GAO reported on selected U.S. companies' views, finding that many
commitment areas, particularly those related to rule of law, were
important to U.S. companies. GAO also found that company	 
representatives expected China's reforms would have a positive	 
impact on their business operations but expected some		 
difficulties during implementation. In 2003, GAO continued to	 
analyze companies' views about (1) the extent to which China has 
implemented its WTO commitments and (2) the impact of China's	 
implementation of its WTO commitments on U.S. companies' business
operations. GAO collected the views of representatives from 82	 
U.S. companies with a presence in China. GAO focused on companies
in the agriculture, banking, machinery, and pharmaceutical	 
industries. Results reflect a response rate of 60 percent of the 
study population. These responses may not reflect the views of	 
all U.S. companies with activities in China.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-508 					        
    ACCNO:   A09563						        
  TITLE:     World Trade Organization: U.S. Companies' Views on       
China's Implementation of Its Commitments			 
     DATE:   03/24/2004 
  SUBJECT:   International organizations			 
	     International trade				 
	     Investment companies				 
	     Investments abroad 				 
	     Surveys						 
	     International economic relations			 
	     Foreign trade agreements				 
	     China						 

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GAO-04-508

United States General Accounting Office

                     GAO Report to Congressional Committees

March 2004

                                  WORLD TRADE
                                  ORGANIZATION

       U.S. Companies' Views on China's Implementation of Its Commitments

                                       a

GAO-04-508

Highlights of GAO-04-508, a report to the Chairman and Ranking Minority
Member, Senate Committee on Finance, and to the Chairman and Ranking
Minority Member, House Committee on Ways and Means

As the second largest source of foreign direct investment in China, U.S.
companies continue their keen interest in China's implementation of its
World Trade Organization (WTO) commitments. China's 2001 WTO commitments
include specific pledges to increase market access, liberalize foreign
investment, continue fundamental market reforms, and improve the rule of
law. In 2002, GAO reported on selected U.S. companies' views, finding that
many commitment areas, particularly those related to rule of law, were
important to U.S. companies. GAO also found that company representatives
expected China's reforms would have a positive impact on their business
operations but expected some difficulties during implementation.

In 2003, GAO continued to analyze companies' views about (1) the extent to
which China has implemented its WTO commitments and (2) the impact of
China's implementation of its WTO commitments on U.S. companies' business
operations. GAO collected the views of representatives from 82 U.S.
companies with a presence in China. GAO focused on companies in the
agriculture, banking, machinery, and pharmaceutical industries. Results
reflect a response rate of 60 percent of the study population. These
responses may not reflect the views of all U.S. companies with activities
in China.

www.gao.gov/cgi-bin/getrpt?GAO-04-508.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Loren Yager at (202)
512-4128 or [email protected].

March 2004

WORLD TRADE ORGANIZATION

U.S. Companies' Views on China's Implementation of Its Commitments

U.S. company representatives who completed GAO's 2003 questionnaire
thought that China had implemented most of the 26 listed WTO commitment
areas on average only to some or little extent. When respondents assessed
five areas found to be of greatest importance to their companies overall
--(1) standards, certifications, registration, and testing requirements;
(2) customs procedures and inspection practices; (3) intellectual property
rights; (4) tariffs, fees, and charges; and (5) consistent application of
laws, regulations, and practices - responses were mixed, but they reported
that China had taken at least some steps to implement these commitment
areas. Our analysis showed that the importance placed on specific areas
differed among the agriculture, banking, machinery, and pharmaceutical
industries. For example, agricultural respondents identified tariffs as
important while banking respondents identified scope of business
restrictions for services as important. Few respondents were able to
assess all of China's commitment areas for reasons that varied depending
on each company's experience and operations in China.

More than two thirds of respondents reported that China's implementation
of its WTO commitments had a positive impact on their companies' ability
to do business in China. However, some respondents indicated that China's
reform efforts had created difficulties for their company operations in
China. Overall, company representatives reported that company activities,
such as volume of production in China and company revenue stream, have
increased since China joined the WTO. However, respondents noted that
changes in business activities cannot be directly attributed to China's
WTO accession.

Impact of China's WTO Implementation on GAO Questionnaire Respondents'
Companies

Note: Number of respondents = 80. Two respondents had no basis to judge.

Contents

    Letter                                                                  1 
                                  Results in Brief                          2 
                                     Background                             3 
                    Companies Report Progress Made in China's WTO         
                                   Implementation                           6 
             Most Respondents Reported a Positive Impact from China's WTO 
                                   Implementation                          17 
                               Concluding Observations                     22 

Appendixes

Appendix I:

Appendix II:

Appendix III:

Appendix IV:

Objectives, Scope, and Methodology

Data Collection
Industry Selection
Sample Development
Questionnaire Administration
U.S. Companies Responding to the Questionnaire
Limitations

Questionnaire of U.S. Companies in China (and U.S. Nonprofit Agricultural
Organizations) on China-WTO Issues

Profile of U.S. Investment and Trade with China

U.S. Investment in China U.S. Trade with China Sources and Methods

GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

24 24 24 26 26 27 31

33

41 41 44 50

53 53 53

Related GAO Products

Tables   Table 1:    2002 Survey Respondents' Views on Difficulty of    
                     Implementation for China's WTO Commitment Areas Most  
                                       Important to Them                    6 
            Table 2:   Ranking of Commitment Areas by Importance to GAO    
                                   Questionnaire Respondents               10 
            Table 3:   GAO Questionnaire Respondents' Views on the Most    
                            Important Commitment Areas, by Industry        13 

                                    Contents

Table 4: Results of Requests for Interviews from U.S.

Companies 26 Table 5: List of GAO Industry Groupings from Census Goods
Trade

Data 52

Figures	Figure 1: Figure 2:

Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9:

Reported Extent of China's Implementation in 26
Commitment Areas
Comparison of Number of Respondents Who Assessed
China's Implementation of Commitment Areas and Those
with No Basis to Judge
Impact of China's WTO Implementation on GAO
Questionnaire Respondents' Companies
U.S. Company Business Activities Since China Joined the
WTO
Number of Companies Responding to GAO's
Questionnaire, by Industry
Location of Facilities or Other Presence of GAO
Questionnaire Respondents
Number and Types of Respondents' Business
Relationships in China
Stock of U.S. Direct Investment in China, 2002 ($10
billion)
Stock of U.S. Direct Investment Worldwide, 2002 ($1.5
trillion)

                                       8

16 18 21 28 29 30 42 44 46 47 48 50

Figure 10: U.S. Exports and Imports of Goods with China, by Industry, 2003

Figure 11: U.S. Exports of Goods to China, Share by Industry, 2003

Figure 12: U.S. Imports of Goods from China, Share by Industry, 2003

Figure 13: U.S. Exports and Imports of Services with China, by Category,
2002

Contents

Abbreviations

BEA Bureau of Economic Analysis
FAS Free-Alongside-Ship
IPR Intellectual property rights
N Number of questionnaire respondents
NAICS North American Industry Classification System
WTO World Trade Organization

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States General Accounting Office Washington, D.C. 20548

March 24, 2004

The Honorable Charles Grassley Chairman The Honorable Max Baucus Ranking
Minority Member Committee on Finance United States Senate

The Honorable William M. Thomas Chairman The Honorable Charles B. Rangel
Ranking Minority Member Committee on Ways and Means House of
Representatives

The 2001 conclusion of 15 years of China's intense negotiations to join
the World Trade Organization (WTO) raised expectations for U.S. companies'
opportunities to trade with and invest in China. In 2002, we reported on
selected U.S. companies' views about their expectations for China's
implementation of its WTO commitments related to their companies doing
business in China. The report revealed that a wide range of commitments
were important to U.S. companies, their belief that WTO commitments would
positively impact their businesses, and their expectation that
implementation would include difficulties as well as successes. China's
first two years of WTO membership repeatedly confirmed the accuracy of
these expectations.

In continuation of your request that we undertake a long-term body of work
regarding China's membership in the WTO, we again analyzed selected U.S.
companies' views about (1) the extent to which China has implemented its
WTO commitments in key industries and (2) the impact of China's
implementation of its WTO commitments on these U.S. companies' business
operations.

To perform our work in 2003, we developed a questionnaire and used it to
conduct structured interviews with representatives of U.S. companies with
a presence in China. We selected participants from a commercial database
listing U.S. companies in China, focusing our company selection on those
within four industries: agriculture, banking, machinery, and
pharmaceuticals. Out of a study population of 149 companies, we received
79 questionnaires, for an overall adjusted response rate of 60 percent. In

addition, we received three questionnaires from companies we interviewed
in 2002 and 11 questionnaires from representatives of nonprofit
agricultural organizations. Unless otherwise indicated, results include
the 79 respondents from the study population plus the three respondents
interviewed in 2003 and 2002. We do not generalize results to the larger
population of U.S. companies doing business in China. Appendix I contains
a more detailed description of our scope and methodology; responses to the
questionnaire are included in appendix II. We performed our work from
October 2002 to January 2004 in accordance with generally accepted
government auditing standards.

Results in Brief 	U.S. company representatives we interviewed who did
business in China reported that China had made some progress in
implementing its WTO commitments. We found that for most of the 26 listed
areas in which China had made commitments, respondents reported that China
had made reforms on average only to some or little extent when asked to
characterize China's WTO implementation. Respondents noted higher scores
in some areas, however, such as reductions in tariffs, fees, and charges.
Our analysis found that the five specific commitment areas of greatest
importance to respondents were: (1) standards, certifications,
registration, and testing requirements; (2) customs procedures and
inspection practices; (3) intellectual property rights; (4) tariffs, fees,
and charges; and (5) consistent application of laws, regulations, and
practices. Respondents had mixed views of China's implementation of these
important commitment areas. Industry-specific views differed in terms of
the specific areas identified as most important to respondents based on
the nature of their businesses. Overall, many respondents reported that
they had no basis to judge certain commitment areas due to respondents'
lack of experience in areas not applicable to their businesses, lack of
understanding about specific WTO commitment areas, and/or inability to
differentiate between China's general economic reforms and Chinese
government actions taken to implement WTO commitments.

More than two thirds of respondents reported that China's implementation
of its WTO commitments had a positive impact on their companies, for
example, by reducing tariffs and increasing transparency (openness) of
laws, regulations, and practices, which ultimately furthered business
opportunities. A number of respondents also expected that China's progress
in the next 2 years would result in a positive impact on their businesses.
However, some company representatives stated that China's WTO reforms had
actually had negative consequences for their business

operations to date. Specifically, some respondents stated that China had
increased registration and testing requirements, and that provinces and
levels of government had varied approaches to WTO implementation. Overall,
the majority of respondents reported that specific business activities
such as revenue and total investments in China had increased, but they
could not directly tie these results to China's having joined the WTO.

Background 	After 15 years of negotiations to join the WTO, on December
11, 2001, China bound itself to open and liberalize its economy and offer
a more predictable environment for trade and foreign investment in
accordance with WTO rules. U.S. investment and trade with China is of
substantial interest to U.S. companies and has increased during the past
10 years. Our 2002 survey of U.S. company views revealed companies'
expectation of a positive impact from China's implementation of WTO
commitments as well as anticipation of difficulties during implementation.

China's WTO Commitments	The results of China's negotiations to join the
WTO are described and documented in China's final accession agreement, the
Protocol on the Accession of the People's Republic of China, which
includes the accompanying Report of the Working Party on the Accession of
China, the consolidated market access schedules for goods and services,
and other annexes. China's WTO commitments are complex and broad in
scope.1 Some commitments related to reforming China's trade regime require
a specific action from China, such as reporting particular information to
the WTO, while others are more general in nature, such as those that
affirm China's adherence to WTO principles.

The accession agreement includes market access commitments regarding goods
and services. These include commitments that will reduce tariffs on
products, as well as commitments to reduce or eliminate many other trade
barriers such as quotas or licensing requirements on some of these
products. Further, China made commitments to allow greater market access
in 9 of 12 general service sectors. In the banking sector, for example,

1For more information, see U.S. General Accounting Office, World Trade
Organization: Analysis of China's Commitments to Other Members, GAO-03-4
(Washington, D.C.: Oct. 3, 2002).

China has agreed to reduce licensing requirements and has removed
restrictions on foreign currency services.

To improve its trade regime, China has generally agreed to make numerous
rule of law-related reforms such as publishing and translating
trade-related laws and regulations and applying them uniformly at all
levels of government and throughout China. China committed to adhere to
internationally accepted norms to protect intellectual property rights and
enforce relevant laws and regulations related to patents, trademarks, and
copyrights. Moreover, China made a substantial number of other rule of
law-related commitments regarding transparency of law, judicial review,
and nondiscriminatory treatment of businesses.

U.S.-China Investment and Trade

In the past 10 years, U.S. investment and trade with China have increased
significantly. At the end of 2002, U.S. companies had total direct
investments of $10.3 billion in China, largely in the manufacturing
sector. This amount represents more than 10 times the approximately $900
million invested a decade earlier in 1993. In addition, U.S. goods exports
and services to China grew at an average annual rate of 12 percent since
1993, totaling $27 billion in 2002, according to the Department of
Commerce. While the United States holds a large bilateral trade deficit
with China, it has a bilateral goods surplus in areas such as
transportation equipment and agricultural products. Appendix III provides
additional details regarding U.S. investment and trade with China.

GAO's Previous Survey of U.S. Companies

In 2002, we conducted a study of U.S. companies' views about the
importance of, the anticipated effects of, and the prospects for, China's
implementing its WTO commitments.2 Our analysis of responses from 191 of
551 surveyed companies3 revealed that most of China's WTO commitments were
important to the companies, with rule of law-related reforms the most
important. Specifically, at least three quarters of the respondents
selected intellectual property rights; consistent application of

2For additional information on U.S. business views in 2002, see U.S.
General Accounting Office, World Trade Organization: Selected U.S. Company
Views about China's Membership, GAO-02-1056 (Washington, D.C.: Sept. 23,
2002).

3The results of our analysis were based on our survey of a random sample
of 551 U.S. companies doing business in China and interviews with 48
judgmentally selected companies in four cities in China.

laws, regulations, and practices; and transparency of laws, regulations,
and practices as the most important commitment areas for their companies.
Other than those related to rule of law, respondents most frequently
selected trading rights; tariffs, fees, and charges; and scope of business
restrictions as important commitments.

We also found that most companies expected that China's implementation of
its WTO commitments would have a positive impact on their business
operations, although many anticipated impediments to implementation of
China's WTO reforms. More than three quarters of the companies reported
that they expected China's implementation of its WTO commitments would
lead to an increase in their companies' activities in China, including
their export volume to China, market share in China, and distribution of
products there. However, many respondents also expected that many WTO
commitments, particularly in rule of law-related commitment areas
regarding consistent application of laws, regulations, and practices, and
intellectual property rights, would be difficult for Chinese officials to
implement. (See table 1 for 2002 survey respondents' views on the expected
level of difficulty of China's implementation of commitment areas that
were most important to them.)

Table 1: 2002 Survey Respondents' Views on Difficulty of Implementation
for China's WTO Commitment Areas Most Important to Them

Expected difficulty of implementation

             Commitment areas of highest importance High Medium Low

Consistent application of laws, regulations, and
practices X

Intellectual property rights X

Enforcement of contracts and
judgments/settlement of disputes in Chinese
court system X

Independence of judicial bodies X

Equal treatment between Chinese and foreign
entities X

Transparency of laws, regulations, and practices X

                                Trading rights X

                          Tariffs, fees, and charges X

Source: GAO-02-1056, p. 24.

Note: These represent 8 of the 30 commitment areas listed in the 2002
survey.

Companies Report Progress Made in China's WTO Implementation

Overall, in 2003, respondents thought that China had implemented most of
the 26 specific WTO commitment areas to at least some extent when asked to
characterize China's reform efforts along a four-point scale ranging from
no extent to great extent. 4 Responses were mixed when company
representatives assessed the commitment areas that we found to be of
greatest importance to their businesses. In addition, the importance
placed on specific commitment areas differed among respondents of the four
industry groups--agriculture, banking, machinery, and pharmaceuticals. It
is also important to note that many respondents reported they had no basis
to judge the extent to which China had made reforms related to some WTO
commitment areas, for reasons that varied depending on each company's
experience and operations in China.

4The 2003 questionnaire listed 26 broad WTO commitment areas, whereas the
2002 survey listed 30 commitment areas. Some commitment areas were
combined in 2003 in response to comments received during administration of
the 2002 survey.

Overall, Companies Report Low and Moderate Marks for the 26 WTO Commitment
Areas

Respondents' assessments of each area varied widely, but they generally
reported low and moderate ratings of China's implementation.5 See figure 1
for respondents' views on the extent of China's implementation of the 26
commitment areas, excluding those with no basis to judge. Many respondents
had no basis to judge the extent of China's WTO reforms in certain
commitment areas. This indicates that few companies have an indepth
knowledge of Chinese reforms across all 26 areas, as discussed in further
detail later. Consequently, the number of company representatives
evaluating each individual commitment area varied from 14 to 67.

5In order to determine the extent to which respondents perceived that
reforms were made in each of the 26 areas, we assigned values of 1 to 4 to
responses ranging from "no extent" to "great extent" on a four-point
scale. We then calculated average extent values for each of the commitment
areas, where averages included the coded values from all respondents who
expressed an opinion.

Figure 1: Reported Extent of China's Implementation in 26 Commitment Areas

Note: The weighted means shown for each commitment area are based on the
number of company representatives that had a basis to judge each
individual commitment area. To calculate the means, "Great extent"
responses were given a weight of 4, "Moderate extent" responses were given
a weight of 3, "Some or little extent" responses were given a weight of 2,
and "No extent" responses were given a weight of 1. The number of
respondents used to calculate each weighted mean is shown in the column
labeled "N".

On average, respondents assigned lower marks when assessing the
implementation of 19 of the 26 listed commitment areas.6 For example,
company representatives thought that China had made reforms to only some
or little extent when assessing China's trading rights reforms7 (right to
import or export products) and price controls.8 Company representatives
said they eagerly awaited the implementation of China's trading rights
commitments in late 2004. Several company representatives noted that
implementation of these commitments would provide more control over their
business relationships in China and reduce or eliminate the need to rely
on third parties such as distributors and trading companies. Although
China had agreed to stop using price controls to restrict the level of
imports, one company representative derided China's price control reforms
and others noted their concern regarding the Chinese government's
continuing control of prices on specific products.

Respondents on average assigned higher marks to the remaining 7 commitment
areas.9 For example, respondents thought that China had made reforms to a
moderate extent when assessing China's reforms to tariffs, fees, and
charges; requirements stipulating a minimum amount of production that must
be exported; and restrictions on partnerships and joint ventures. Several
respondents described China's efforts in lowering tariffs, fees, and
charges including one respondent who noted that China had reduced tariffs
for an agricultural product from 35 to 15 percent since joining the WTO.
Company representatives also discussed China's

6These 19 commitment areas had average scores from 1.8 to 2.4, where
values ranging from 1.5 to 2.5 represent a response of "some or little
extent."

7The WTO accession agreement committed China to phasing out the general
limitations on companies' rights to trade-that is, to import or
export-within 3 years of accession.

8Price controls in China primarily take two forms-direct state or
government pricing and the more flexible government guidance pricing.
Although China has liberalized price controls, imported goods that remain
subject to state trading control also remain subject to price controls or
government guidance on prices.

9These 7 commitment areas had average scores from 2.6 to 2.9, where values
ranging from 2.5 to 3.5 represent a response of "moderate extent."

allowance for greater market access for services, stated that WTO has
allowed companies to provide after-sales service, and one said that "China
is doing a good job" in addressing this area.

Respondents Had Mixed Views on Important Commitment Areas

Respondents' assessments of the most important commitment areas provide
further detail regarding companies' views on China's progress. See table 2
for the ranking of the commitment areas by importance to respondents,
which we calculated using weighted responses. More than half of
respondents reported that China had made reforms to a moderate or great
extent when asked to assess China's overall progress in implementing
reforms that were important to their companies. However, when asked to
assess China's implementation of specific commitment areas, responses for
four of the five most important areas fell in the "some or little extent"
category. Company representatives from the four industries assigned varied
levels of importance to specific commitment areas.

    Table 2: Ranking of Commitment Areas by Importance to GAO Questionnaire
                                  Respondents

                                                                     Weighted 
Rank                       Commitment area                           score 
    1   Standards, certifications, registration, & testing                 51 
        requirements (product safety, animal, plant, & health        
                              standards, etc.)                       
    2            Customs procedures & inspection practices                 42 
    3                   Intellectual property rights                       40 
    4                     Tariffs, fees, & charges                         39 
    5     Consistent application of laws, regulations, & practices         36 
               (within & among national, provincial, & local         
                                  levels)                            
    6           Trading rights (ability to import & export)                31 
    7                    Market access for services                        27 
    8    Scope of business restrictions for services (types you can        24 
                provide, customers you can do business with,         
          number of transactions you can conduct, & where you can    
                      conduct business geographically)               
    9       Foreign exchange restrictions (including balancing &           23 
                          repatriation of profits)                   
    9    Transparency of laws, regulations, & practices (publishing        23 
                       and making publicly available)                
    9   Enforcement of contracts & judgments/Settlement of disputes        23 
                          in Chinese court system                    
    12                      Distribution rights                            18 
    13       Quotas and other quantitative import restrictions             15 
    14  Scope of business restrictions for goods (types you can            13 
        provide, customers you can do business with, number          
          of transactions you can conduct, & where you can conduct   
                          business geographically)                   
    15     Government requirements stipulating minimum amount of           11 
                      production that must be exported               

(Continued From Previous Page)

                                                                     Weighted 
Rank                       Commitment area                           score 
    16    Restrictions on partnerships & joint ventures (choice of          7 
                          partner & equity limits)                   
    17    Price controls including dual and discriminatory pricing          5 
    18   Establishment & employment requirements (capital, deposit,         4 
                 years in practice, threshold sales, forced          
             investment, & nationality/residency requirements)       
    18   Equal treatment (in taxation, access to funding, and under         4 
                                Chinese law)                         
    18              Operation of state-owned enterprises                    4 
    18                      Export restrictions                             4 
    22                Independence of judicial bodies                       3 
    22                           Subsidies                                  3 
    24                   Local content requirements                         2 
    25                Technology transfer requirements                      1 
    26     China's application of safeguards against U.S. exports           0 
            (antidumping and other legal actions against import      
                                  surges)                            

Source: GAO analysis of responses to GAO 2003 Questionnaire of U.S.
Companies in China on China-WTO Issues, question 5b.

Note: The weighted score is the sum of weighted votes by respondents
identifying each commitment area as one of the three most important areas
for their companies (3, 2, 1 values assigned to top, second, and third
choices, respectively). The five most important commitment areas are shown
in bold type.

Respondents Rated Progress in The five specific commitment areas ranked as
most important to

                      Five Most Important Commitment Areas

respondents overall were (1) standards, certifications, registration, and
testing requirements; (2) customs procedures and inspection practices; (3)
intellectual property rights; (4) tariffs, fees, and charges; and (5)
consistent application of laws, regulations, and practices. Among these
five areas, tariffs, fees and charges received higher marks, with
respondents reporting on average that China had made reforms to a moderate
extent. Respondents noted that it was relatively easy to assess China's
implementation of tariffs, fees, and charges because China had set time
schedules for tariff reductions on various products. Many respondents told
us that China's efforts to achieve tariff reductions were on schedule,
allowing companies to pay lower tariffs on imported products.

Respondents provided lower ratings on average for the four other important
commitment areas and indicated that China had only implemented these
reforms to some or little extent. In the area of standards,
certifications, registration, and testing requirements, for example, some
respondents discussed continuing requirements such as product
registrations that require approval from multiple Chinese government
agencies, delays and bureaucratic bottlenecks in processing product
registration, and the use of product standards to protect Chinese

agricultural producers. When evaluating China's reforms made in customs
procedures and inspection practices, company representatives discussed the
"hassles" and inefficiencies created by an unpredictable and slow customs
system characterized by inconsistent application of standards and duties.
In addition, numerous company representatives discussed the limitations of
China's efforts to address intellectual property rights. Respondents cited
specific experiences with generic copies of pharmaceutical products,
products illegally copied to look like those of U.S. companies, and false
labeling of Chinese products. Some respondents even commented on the
Chinese government's inadequate enforcement of intellectual property
rights. Furthermore, some respondents noted inconsistency in China's
application of laws, regulations, and practices within and among national,
provincial, and local levels of government. For example, one banking
representative said that different local governments each have different
explanations of China's laws and regulations. This issue illustrates a
larger rule of law-related problem discussed by company representatives:
the Chinese national government's commitment to WTO implementation did not
always coincide with local governments' interpretation and implementation
of China's commitments.

Industries Placed Importance on Respondents among the four selected
industries (agriculture, banking,

Different Commitment Areas	machinery, and pharmaceuticals) had different
views on the commitment areas most important to their companies. For
example, representatives of agricultural companies and organizations noted
the significance of quota reductions while representatives of banking
firms emphasized commitments related to market access for services and
foreign exchange restrictions. Moreover, machinery company representatives
identified customs procedures and inspection practices as an important
area for their transport of goods. For pharmaceutical companies,
intellectual property and trading rights stood out as among the most
important commitments. Table 3 shows respondents' views on the most
important commitment areas by industry.

Table 3: GAO Questionnaire Respondents' Views on the Most Important
Commitment Areas, by Industry

Agriculture (Company representatives = 5; Agricultural organization
representatives = 10)

(1) Standards, certifications, registration, and testing requirements

                         (2) Tariffs, fees, and charges

(3) Quotas and other quantitative import restrictions

Banking (Company representatives = 10)

         (1) Consistent application of laws, regulations, and practices

(2) Scope of business restrictions for services

(2) Market access for services

(3) Foreign exchange restrictions

Machinery (Company representatives = 48)

 (1) Customs procedures and inspection practices (2) Tariffs, fees, and charges
(2) Standards, certifications, registration, and testing requirements (3)
                          Intellectual property rights

                 Pharmaceuticals (Company representatives = 12)

 (1) Intellectual property rights (2) Standards, certifications, registration,
                  and testing requirements (3) Trading rights

Source: GAO analysis of responses to GAO 2003 Questionnaire of U.S.
Companies in China on China-WTO Issues and GAO 2003 Questionnaire of U.S.
Nonprofit Agricultural Organizations, question 5b.

Note: Representatives from each industry and agricultural organizations
selected the commitment areas included above as the three most important
commitment areas for their companies. The same ranking number is shown
when the responses were the same for multiple commitment areas. These
results include those responding from the study population of 79 company
representatives, the 11 representatives of agricultural organizations, and
one agricultural company interviewed in 2003 and 2002.

The relative importance that respondents from the four industries assigned
to each of the 26 commitment areas reflected the nature of their
businesses. Company representatives also described the importance of these
commitment areas in terms of their experiences with China's reform
efforts. First, for example, agricultural companies identified the
tariff-rate quota system10 as well as China's application of sanitary and
phytosanitary measures and inspection requirements as important.
Similarly, other

10China has committed to allow controlled access for imports of some bulk
agricultural commodities using the tariff-rate quota system.

agriculture respondents emphasized the importance of tariffs and one
company representative noted that some agricultural tariffs applicable to
his company had declined as much as 40 percent. A representative of an
agricultural organization also noted that although China had increased
trading rights, continued quota restrictions undermined this effort.
Second, key issues for banking firms (a service industry) included China's
market access commitments to fully open the industry to foreign banks 5
years after China's accession to the WTO. Banking industry representatives
also identified scope of business restrictions, which can limit the types
of services offered to clients, as important. However, company
representatives also told us that market access obstacles, such as branch
licensing that limits the ability of foreign banks to offer additional
products and to expand geographically, continue to exist. Next, machinery
companies identified the importance of China's tariff rates and product
certification system that sometimes involves on-site inspection of
manufacturing facilities outside of China. Some machinery company
representatives discussed the importance of timely product certification
at the ports, the importance of an efficient product registration process
for new products imported into China, and the need for testing procedures
at customs that allow products to enter the country without damage caused
by product testing. Finally, representatives from pharmaceutical companies
identified protection of intellectual property rights as important and
said that they continue to face challenges in this area. Specifically,
several pharmaceutical company representatives discussed the continued
need for patent protection to prevent counterfeiting of drugs sold at a
fraction of the price charged for the genuine product. A few
representatives of pharmaceutical firms noted that the Chinese government
had allowed counterfeit generic drugs to be sold and believed that China
displayed discrimination favoring Chinese products rather than complying
with the principle of national treatment, under which imported foreign
products and services are treated no less favorably than domestic products
or services. As described by one company representative, although
protection of intellectual property rights is getting better, the
situation is still bad. Another respondent said simply that "piracy is
everywhere" in China.

Many Respondents Could Another notable finding of our questionnaire is
that many respondents Not Assess Progress of were unable to assess certain
commitment areas listed in our China's WTO questionnaire. Company
representatives provided a number of

explanations for their limited ability to evaluate China's progress
inImplementation implementing specific WTO commitment areas. Specifically,
for 13 of the 26 specific commitment areas we asked about, more than half
of the

respondents said they had no basis to judge the extent to which China had
made reforms in these commitment areas. Most notably, for four commitment
areas, at least three quarters of the respondents selected "no basis to
judge" when asked to assess the extent to which China had actually made
reforms in these commitment areas. These areas included export
restrictions, such as eliminating taxes and charges on exports; China's
application of safeguards against U.S. exports, which includes
antidumping11 measures and other legal actions against import surges;
local content requirements; and government requirements stipulating a
minimum amount of production that must be exported. See figure 2 for the
number of respondents who indicated they had no basis to judge China's
reforms and those who assessed China's implementation of its WTO
commitment areas.

11Antidumping measures include a duty or fee imposed to neutralize the
injurious effect of unfair pricing practices known as "dumping." Dumping
refers to the sale of a commodity in a foreign market at a price lower
than its fair market value.

Figure 2: Comparison of Number of Respondents Who Assessed China's
Implementation of Commitment Areas and Those with No Basis to Judge

The reasons for a "no basis to judge" response could result from any
number of factors, including the irrelevance of specific commitment areas
to particular companies, lack of experience with commitment areas, and
lack of knowledge about China's WTO commitments. Some company
representatives told us that they could not assess commitment areas that
simply did not apply to their companies. For example, representatives of
machinery companies had no basis to judge "scope of business restrictions
for services" because they did not provide services. Other respondents
stated that their companies did not have experience with particular
commitment areas, such as one respondent's inability to comment on
"independence of judicial bodies" because the respondent's company had not
accessed the Chinese judicial system. Moreover, some respondents noted
that they did not have sufficient awareness and understanding of the exact
terms of China's WTO commitments and/or did not actively track specific
Chinese implementation efforts. Several respondents told us that they
often could not distinguish between China's broad economic reforms and its
actions taken to implement specific WTO commitments. Other respondents
said that the WTO did not apply to their company's business model, did not
really matter to their business, or did not have relevance to current
market conditions that affected their business.

Most Respondents Reported a Positive Impact from China's WTO
Implementation

Most respondents reported that China's implementation of its WTO
commitments had had a positive impact on their companies, even though some
company representatives indicated that China's reform efforts would
continue to present challenges for their company operations in China. For
example, one respondent noted the success of his company's overall
operations in China but stated that implementation of China's WTO
commitments remained slow and problematic. Another company representative
noted that although actual changes are happening very slowly, the overall
pressure to reform is having a positive effect. Companies also provided
information on whether various business activities had increased, stayed
about the same, or decreased since China joined the WTO in December 2001.
The majority of respondents reported that most of the 13 business
activities such as revenue stream and volume of production in China had
increased. Company representatives described a broad range of increased
company activities including new lines of business and new products,
expansion of existing business to meet growing demand, and the opening of
new branch offices and factories. Some respondents discussed the broad
range of factors that influence company business activities. Respondents
cited other factors, such as the business environment in

China and general market and economic conditions, as more direct
influences on company activities than China's WTO membership.

Company Representatives Reported Positive Impact on Business in China

Overall, company representatives reported a generally positive impact from
implementation. More than two thirds of the 80 company representatives
responding to this question reported that China's implementation of its
WTO commitments had had a positive impact on their companies, as shown in
figure 3. Some respondents noted that China's accession to the WTO had
increased business opportunities for their companies through changes such
as decreased tariffs and increased transparency of laws and regulations.
Respondents also noted that the lower tariffs helped to improve business
in China and had had an immediate impact on their bottom line because of
reduced costs, ultimately helping their companies increase profits. One
company representative told us that the prevalence of government officials
with a pro-business attitude and the ability to speak English proficiently
had contributed to the positive impact on company operations in China.

Figure 3: Impact of China's WTO Implementation on GAO Questionnaire
Respondents' Companies

              Note: N = 80. Two respondents had no basis to judge.

Responses regarding the impact of China's WTO implementation on their
companies varied when analyzed by company size and industry. First, when
analyzed by company size, a majority of representatives of small-and
medium-sized enterprises reported little, no, or a negative impact from
WTO implementation. Large company representatives responded more
positively, with nearly three quarters selecting either "very positive" or
"generally positive" when asked what impact China's WTO implementation had
on their company's ability to do business in China. Second, a majority of
respondents in three of the four industries reported a positive impact on
company operations. Specifically, most of the representatives of
agricultural companies reported little, no, or a negative impact from
China's implementation efforts. Agriculture respondents discussed negative
consequences resulting from WTO-inspired testing requirements that
ultimately resulted in the rejection of U.S. shipments to China. In
contrast to agriculture, almost all of the banking industry respondents
reported either a very positive or generally positive impact on their
companies' ability to do business in China. One representative from a
banking company stated that his company has a positive view of market
development in China-the rules seem much clearer for banks and there is an
increased sense of assurance that the company can be successful as a
result of China's WTO implementation. A majority of the manufacturing and
pharmaceutical company respondents also reported more positive than
negative responses regarding the impact of China's WTO implementation on
their companies.

Impact from China's Reforms A number of company representatives reported a
positive outlook for their

                              Expected to Continue

future in China when asked about the likely impact that China's WTO
implementation would have in 2 years' time, but they also noted the
challenges they expect to continue. Some respondents said they expected
the overall business environment in China would improve significantly.
Others specifically discussed WTO commitments that would have an impact on
their ability to do business in China. For example, some respondents
stated that additional tariff cuts would reduce product costs and result
in increased profits. However, other respondents discussed obstacles
hindering reform efforts. One company representative noted that China's
regulatory reforms may be fine on paper, but speculated that actual
implementation could invalidate the intent of the reforms. Some company
representatives noted that different interpretations of laws and
regulations as well as varied approaches to implementation between
provinces and levels of government create challenges for foreign companies
in China. Several company representatives discussed ongoing delays to
business operations resulting from Chinese requirements for product
registration

and testing. Generally, company representatives said that progress is
continuing, that their parent companies would continue investing in
business operations in China, and that they expected the overall business
climate to improve, but reforms could take time.

Company Business Activities in China Increasing

Overall, our questionnaire respondents reported that their company
activities have increased since China joined the WTO. Respondents
indicated whether their companies' business activities in 13 areas had
increased, stayed about the same, or decreased since China joined the WTO
in December 2001. Specifically, at least 70 percent of respondents
reported that their companies' business activities had increased for 9 of
the 13 listed activities, as shown in figure 4. Some company
representatives told us that China's WTO membership helps to attract
foreign investment, which in turn helps their businesses. In contrast,
most respondents reported that the other four activities had stayed the
same or decreased. Activities that had stayed the same or decreased
included the number and value of their ventures with Chinese partners.
None of the respondents to our questionnaire reported a decrease in the
number of products distributed in China, the scope of product distribution
in China, or the number of services provided in China. But almost one
third of respondents indicated that the number of company employees in the
United States had decreased while about one sixth reported an increase.
Respondents told us that the number of employees in the United States
depends on factors other than China's WTO accession, such as current
economic conditions, corporate restructuring, changes in the company's
industry, and/or a change in company strategy. Some respondents also
discussed the difficulty of identifying a link between other company
activities and China's WTO membership. Company representatives cited a
number of possible influences on changes in company activity levels, such
as China's ongoing economic reforms, an improving business environment in
China, and market development opportunities in China.

Figure 4: U.S. Company Business Activities Since China Joined the WTO

Note: Percentages for the individual activities are based on the number of
respondents who made a judgment about each business activity. Therefore,
the percentages do not include respondents who checked "No basis to judge"
or "No answer," or did not provide an answer. Percentages may exceed 100
percent due to rounding. Appendix II provides a breakdown of these
responses.

Concluding Observations

Our analysis of U.S. companies' responses to our questionnaire provides
findings and lessons that have important implications for policymakers who
rely on private sector input in order to judge China's progress in opening
its market. As noted in our March 2003 report, the private sector plays an
important role in monitoring and enforcement activities. Our results
indicate areas where China has made progress in carrying out WTOrelated
reforms and areas that might need more attention. Our results also show
that despite the problems U.S. companies are facing in China's
implementation of specific commitment areas, more than two thirds of
respondents indicated that China's WTO implementation had a positive
impact on their companies' ability to do business in China.

Our work also provides a number of lessons regarding the use of private
sector input that could help shape best practices for U.S. government
efforts to monitor and enforce China's compliance with its commitments.
First, because company experiences and assessments varied, both overall
and among companies in the same industry, policymakers are well advised to
seek input from a number of companies with interests in an area of concern
and not just a few companies. Doing so increases the representativeness of
the information gathered for monitoring purposes, because views are often
company-specific and one company in an industry cannot be assumed to speak
for all.

Second, we found that the number of company representatives who report
they have a basis to judge China's implementation of specific WTO
commitment areas varies greatly. Broad input from a wide range of
companies assures policymakers that monitoring is authoritative and
complete because relatively few individual companies believed they had a
basis to judge all 26 commitment areas. Furthermore, in some cases, like
Chinese export restrictions, application of safeguards, and/or subsidies,
very few U.S. companies reported they had a basis to judge implementation.
This observation raises the question of whether U.S. government officials
can rely on private sector input to identify the full range of China's
compliance problems. Instead, for some commitment areas, alternative
strategies that reach out to specific companies or that rely on economic
or legal information to identify problems, for example, may be needed to
monitor China's implementation.

Finally, we report that respondents cited a number of factors that
influence company activities in addition to China's efforts to implement
specific WTO commitments. These results reaffirm the importance of ongoing
private

sector education about China's WTO obligations and the market access
opportunities that the private sector should expect. Furthermore, it
indicates that any monitoring strategy benefits from collecting and
reviewing information about what companies may consider solely "commercial
problems" but that may actually involve WTO-related issues, where the U.S.
government can clearly take action.

Nevertheless, knowledge of U.S. company views remains fundamental for
policymakers to judge the degree to which the benefits of China's WTO
membership are being realized. We will consider the implications of this
work as we conduct our current review of U.S. government monitoring and
enforcement activities.

We are sending copies of this report to interested congressional
committees. We will make copies available to others on request. In
addition, the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me
at (202) 512-4128. Other GAO contacts and staff acknowledgments are
listed in appendix IV.

Loren Yager
Director, International Affairs and Trade

Appendix I

                       Objectives, Scope, and Methodology

The Chairman and the Ranking Minority Member of the Senate Finance
Committee and the Chairman and the Ranking Minority Member of the House
Committee on Ways and Means asked us to undertake a long-term body of work
relating to China's membership in the World Trade Organization (WTO). This
work began in 2001 and includes examining, through annual surveys, the
experience of U.S. firms doing business in China. Our objectives for this
report were to assess the views and experiences of selected U.S. companies
with a presence in China regarding (1) the extent to which China has
implemented its WTO commitments in key industries and (2) the impact of
China's implementation of its WTO commitments on these U.S. companies'
business operations. To respond to our objectives, we collected the views
of 82 U.S. companies and 11 representatives of U.S. agricultural
associations with offices in China.

Data Collection	To answer our two objectives, we gathered company views
primarily via inperson interviews in China; we also conducted some
interviews by telephone in instances when it was logistically impossible
to schedule inperson meetings. We used this approach because the work we
conducted for our 2002 report on U.S. company views indicated that this
method would yield better response rates than mail or Web surveys and
would allow us to contact the corporate representatives who were most
knowledgeable about WTO implementation issues. We selected the
participants from a commercial database listing U.S. companies that were
identified as being in China as of 2003. We purchased the database,
Foreign Companies in China 2003, from Commercial Intelligence Service, a
division of Business Monitor International. Our research indicated that
this database best met our need for identifying U.S.-nationality companies
and their respective contact information in China by industry. However,
the database likely does not include all U.S. companies in China, because
foreign investors present a constantly changing population, some companies
in China may not wish to publicize their presence, and/or because it is
not always clear who is the ultimate parent of corporate subsidiaries.

Industry Selection	We selected industries that encountered implementation
issues, had key commitments implemented during China's first year of WTO
membership, and industries with concentrations of U.S. foreign investment
in China. The four industries included: agriculture, banking, machinery,
and pharmaceuticals. Although fewer U.S. agriculture-related companies
have a

Appendix I
Objectives, Scope, and Methodology

physical presence in China than the other three selected industries,
agriculture emerged as a key implementation issue in 2002, and its
importance continued in 2003. In addition to interviewing the agricultural
firms listed in the purchased database, we also conducted structured
interviews with a judgmental selection of 11 representatives of nonprofit
agricultural associations in China. The representatives of these
associations promote U.S. agricultural exports to China for various
commodities. We interviewed them to gain a more complete understanding of
U.S. agricultural interests in China and do not generalize their responses
to the full universe of nonprofit agricultural associations. Funding for
representative offices of these associations in China is in part provided
by the U.S. government through the Department of Agriculture's Foreign
Market Development Cooperator Program.1 We administered the same
questionnaire we used for the private sector firms, with slight
modifications to acknowledge the nature of these cooperators as nonprofit
associations rather than companies. Data for these associations are
presented separate from company representative responses in the report.
Next, the banking industry provided an opportunity to explore the
experiences of firms that provide services in China. Banking issues also
emerged as a concern for U.S. government officials during the first year
of China's WTO membership. Third, machinery is an industry with
representation from a broad range of U.S. companies. Finally, for the
pharmaceutical industry, numerous commitments were scheduled for
implementation during China's first 2 years of WTO membership. In
addition, this industry provided an opportunity for us to explore the
experience of companies with an interest in intellectual property rights,
a key issue during the first year of China's WTO membership.

1The Foreign Market Development Cooperator Program provides financial
assistance to nonprofit U.S. agricultural trade organizations that have
the broadest possible producer representation of U.S. agricultural
commodities being promoted in foreign markets. The funds provided under
the Commodity Credit Corporation Charter Act for this program (15 U.S.C.
714c(f)) are made available on a competitive basis for the promotion of
generic activities that do not involve promotions targeted directly to
consumers. The U.S. Department of Agriculture's Foreign Agricultural
Service administers the Cooperator Program.

                                   Appendix I
                       Objectives, Scope, and Methodology

Sample Development	Companies from the four selected industries were
identified in the aforementioned electronic database, Foreign Companies in
China 2003, purchased from the Commercial Intelligence Service. The
database contained a total of 243 contacts for companies in the four
selected industries. We reviewed the list of contacts in order to
judgmentally identify primary, secondary and tertiary contacts for each
company. In addition, we confirmed U.S. incorporation for each company,
leaving a total of 149 companies in our study population.

During the scheduling process, it became apparent that positive responses
from companies on the invited list of 149 companies might not fill our
itinerary for the planned 2-week data-gathering trip to China in October
2003. Consequently, we supplemented the list of 149 companies with the
list of 48 companies that had completed interviews with us in China in
2002. Three of these 48 companies accepted the interview invitation and
completed structured interview questionnaires. These companies are
included in our data analysis of 82 questionnaire responses. See table 4
for an explanation of the results of requests for interviews with the 149
companies from the four selected industries.

Table 4: Results of Requests for Interviews from U.S. Companies

Number of Result companies

Usable response received

Refusal

                    Contact information could not be located

                  Parent company incorporated outside the U.S.

                  Company name identified as duplicate listing

Other (out of business or no longer invested in China)

Source: GAO analysis of U.S. companies in agriculture, banking, machinery,
and pharmaceutical industry listings from Commercial Intelligence Service
database.

Note: The study population included 149 companies. GAO received responses
from 82 of these companies. However, we interviewed 3 of these companies
in 2002, but their names did not appear in the purchased database.
Consequently, these three responses are not included in the study
population results shown in table 4.

 Questionnaire We conducted structured interviews with representatives of U.S.
  firms and Administration agricultural organizations in the United States and
                             Beijing, Shanghai, and

                                   Appendix I
                       Objectives, Scope, and Methodology

Hong Kong, China, in October 2003. 2 Structured interviews provided an
opportunity to discuss questionnaire responses in greater detail as well
as gain an understanding for the context of these responses. We discussed
topics during the interviews that included the importance of China's WTO
commitment areas, the extent to which China had implemented reforms in WTO
commitment areas, and the impact of China's reforms on respondents'
companies.

We restricted our analysis to the subset of firms that responded to our
questionnaire, and we did not make estimates about the larger population
of all U.S. companies with a presence in China. From the study population
of 149 U.S. companies with a presence in China, we received 79
questionnaires, for an overall response rate of 60 percent.3

As the response rate was 60 percent, and some key questions had a high
frequency of "no basis to judge" responses, we did not calculate sampling
errors, and we present questionnaire results in this report in unweighted
form. The unweighted responses represent the responses received and are
not projected to the population of U.S. companies with a presence in China
nor the four selected industries.

U.S. Companies Responding to the Questionnaire

Respondents to our questionnaire from the study population represented
four industries: agriculture, banking, machinery, and pharmaceuticals. The
largest number of respondents represented machinery companies, followed by
pharmaceuticals, banking, and agriculture. Figure 5 displays the number of
respondents from each of the four industries.

2Our work included a several-month suspension due to travel restrictions
resulting from the outbreak of Severe Acute Respiratory Syndrome (SARS) in
China in 2003.

3We calculated the response rate as (Responses received) / (Responses
received + Refusals

+ estimated eligible nonrespondents)=(79/(79+38+15.29))=59.72 percent.
Estimated eligible nonrespondents were calculated as the proportion of
contacted companies that were eligible (79/(79+7+5+2)=94.95 percent),
multiplied by the number of companies that could not be located, or 0.9495
x 18 = 15.29.

                                   Appendix I
                       Objectives, Scope, and Methodology

Figure 5: Number of Companies Responding to GAO's Questionnaire, by
Industry

Note: N=80. The number of company respondents reflected in the figure
includes the 79 respondents from the four industries selected in 2003 plus
one agricultural company not listed in the purchased database that we
interviewed in 2003 and 2002. The other two companies interviewed in 2003
and 2002 were not in any of the four selected industries.

Location of Respondents in China

Questionnaire respondents reported that they carry out their business
activities in facilities and offices across all of China. Shanghai,
Beijing, and Guangzhou were the most frequent responses to the question of
where companies had a facility or other presence among all of the Chinese
locations listed in our questionnaire (listed in order of frequency of
responses). In fact, only a few respondents (less than five) did not have
a facility or other presence in Shanghai, Beijing, or Guangzhou. About one
third of respondents reported having facilities or some other presence in
all three of these locations, while about two thirds of respondents
reported having a presence in locations beyond Shanghai, Beijing, and
Guangzhou. Figure 6 shows the number of companies that reported having a
facility or other presence in each location in China listed in our
questionnaire.

Appendix I
Objectives, Scope, and Methodology

    Figure 6: Location of Facilities or Other Presence of GAO Questionnaire
                                  Respondents

            Note: N=82. Respondents could select multiple locations.

                                   Appendix I
                       Objectives, Scope, and Methodology

                  Respondents' Business Relationships in China

Respondents reported that they engage in a range of business relationships
in their many locations throughout China. More than two fifths of
respondents reported having one type of business relationship; about one
third of the respondents had two types of relationships; and about one
quarter of the respondents reported three or more types of business
relationships there. Wholly owned foreign enterprises, joint ventures, and
representative offices were the most frequently reported types of business
relationships, respectively. Figure 7 displays the number of respondents
that reported each type of business relationship.

Figure 7: Number and Types of Respondents' Business Relationships in China

Note: N=82. Respondents could select all business relationships that
applied.

                                   Appendix I
                       Objectives, Scope, and Methodology

Respondents' Company Size	Respondents also varied in terms of the number
of employees in the United States and the number of employees in China.
The number of employees in the United States varied from none (such as a
company incorporated in the United States but with all employees in China)
to 90,000. Most of the companies that completed our questionnaire,
however, were large companies. Less than 15 percent of respondents
reported that they had 500 or fewer employees in the United States. The
number of employees that companies reported having in China ranged from
zero to 8,000. Almost two thirds of respondents reported that they had 500
or fewer employees in China.

Limitations	All firms that responded to our questionnaire were assured
that their responses would remain confidential. In spite of this, due to
the sensitive and/or proprietary nature of the topics discussed, it is
possible that the data presented in this report reflect the views of
respondents only to the extent to which they felt comfortable sharing them
with an agency of the U.S. Congress. In addition, respondents reported
varied knowledge of China's WTO commitments and their application to their
companies.

Measures Taken to Address Limitations

Other potential sources of errors associated with the questionnaire, such
as question misinterpretation and question nonresponse, may be present. We
included steps in the development of the questionnaire, the data
collection, and data analysis to reduce possible nonsampling errors. We
developed this questionnaire based on the experience we gained
administering the instrument for our 2002 survey of U.S. companies with a
presence in China. In addition, we solicited feedback from internal and
external parties on a draft of this year's questionnaire. We pre-tested
the questionnaire with eligible representatives of U.S. companies with a
presence in China to help ensure that our questions were interpreted
correctly and that the respondents were willing to provide the information
required.

We addressed possible interviewer bias, including the fact that we
conducted some interviews by telephone, by ensuring that all respondents
had copies of the instrument in front of them when we conducted our
interviews. We compared the results of our questionnaire to those of
recent surveys of U.S. companies in China that were conducted by the
U.S.-China Business Council and the American Chambers of Commerce in China
and in Shanghai. While these surveys targeted different populations of
U.S. companies in China and had low response rates, we noted that both had
a

Appendix I
Objectives, Scope, and Methodology

few questions that were similar to ones we used and that both obtained
results that were broadly similar to ours.

We did our work in the Washington, D.C., area, and in Beijing, Hong Kong,
and Shanghai, China. We performed our work from October 2002 to January
2004 in accordance with generally accepted government auditing standards.

Appendix II

Questionnaire of U.S. Companies in China (and U.S. Nonprofit Agricultural
Organizations) on China-WTO Issues

Note: The questionnaire given to company representatives differed slightly
from the version administered to nonprofit agricultural organizations.
Wording differences for questions that differed are noted throughout the
questionnaire in parentheses. Agricultural organizations were not asked a
few questions in this questionnaire. An asterisk marks one additional
question that was asked of agricultural organizations and not asked of
company representatives. Numbers shown in bold

throughout the questionnaire denote company representatives' responses and
do not include responses by nonprofit agricultural organizations.
Agricultural organizations' responses are denoted in parentheses for
applicable questions.

Appendix II
Questionnaire of U.S. Companies in China
(and U.S. Nonprofit Agricultural
Organizations) on China-WTO Issues

Q2) Currently, what forms of business investment and operations does your
company have in China? N = 82

1. [11] Agent/Distributor in China

2. [42] Representative Office

3. [10] Minority Equity Joint Venture

4. [31] Majority Equity Joint Venture

5. [ 4 ] Contractual Joint Venture

6. [ 4 ] Foreign-invested Stock Companies

7. [48] Wholly Owned Foreign Enterprise

8. [12] Other (Please describe.)

Q3) Where in China does your company have facilities or any other
presence? N = 81

                              Facilities/           Facilities/ 
                                 other                 other    
                               presence              presence   
                                  11      p) Inner       4      
                   a) Anhui               Mongolia  
                                  63         q)         26      
                  b) Beijing               Jiangsu  
                                  15         r)          7      
                 c) Chongqing              Jiangxi  
                  d) Dalian       14      s) Jilin       7      
                                             t)                 
                  e) Fujian       16      Liaoning      10
                                           (except  
                                          Shenyang) 
                                             u)                 
                 f) Guangdong     20      Shandong      15
                                  33         v)         66      
                 g) Guangzhou             Shanghai  
                  h) Guangxi       9      w) Shanxi      8      
                 i) Guizhou &      6         x)         14      
                    Yunnan                Shenyang  
                                   7         y)         16      
                  j) Hainan                Shenzen  
                                  13         z)         14      
                   k) Hebei                Sichuan  
                      l)           8         aa)        23      
                 Heilongjiang              Tianjin  
                                          ab)                   
                                          Western   
                                          province  
                                          (Any)     
                   m) Henan        8      (Shaanxi,      9
                                          Gansu,    
                                          Qinghai,  
                                          Ningxia,  
                                          Xinjiang, 
                                          & Tibet)  
                                   8         ac)        12      
                   n) Hubei               Zhejiang  
                   o) Hunan        7      ad) Other     16      

Q4) Approximately how many permanent, full-time employees does your
company (organization) have in the United States and in China? N = 82

a) Approximate number of permanent full-time employees in the United
States _________

b) Approximate number of permanent full-time employees in China ________

Appendix II
Questionnaire of U.S. Companies in China
(and U.S. Nonprofit Agricultural
Organizations) on China-WTO Issues

WTO-RELATED QUESTIONS

Now we'd like to ask you some questions about your company's
(organization's) experiences in your industry since China joined the World
Trade Organization in December 2001.

Q5a) Please look at the list of China's WTO reform commitment areas. Which
are important to your company (organization) and why?

              Tariff & nontariff trade restrictions (increased market access) 
                              1. Tariffs, fees, & charges N=79 (Ag Org N =10) 
              2. Quotas and other quantitative import restrictions (licensing 
              & tendering requirements) N=78 (Ag Org N=11)                    
              3. Standards, certifications, registration, & testing           
              requirements (product safety, animal, plant, & health           
              standards, etc.) N=78 (Ag Org N=11)                             
              4. Customs procedures & inspection practices N=78 (Ag Org N=11) 
                                    5. Export restrictions N= 77 (Ag Org N=9) 
                            6. Market access for services N = 79 (Ag Org N=9) 
              Investment-related measures (liberalized foreign investment) 7. 
              Government requirements stipulating minimum amount of           
              production that must be exported N= 78 (Ag Org N=10)            
                      8. Foreign exchange restrictions (including balancing & 
                                  repatriation of profits) N=79 (Ag Org N=10) 
                       9. Technology transfer requirements N=77 (Ag Org N=10) 
                            10. Local content requirements N=76 (Ag Org N=10) 
              11. Scope of business restrictions for goods (types you can     
              provide, customers you can do business with, number of          
              transactions you can conduct, & where you can conduct business  
              geographically) N=76 (Ag Org N=11)                              
              12. Scope of business restrictions for services (types you can  
              provide, customers you can do business with, number of          
              transactions you can conduct, & where you can conduct business  
              geographically) N=75 (Ag Org N=10)                              
                 13. Restrictions on partnerships & joint ventures (choice of 
                                  partner & equity limits) N=77 (Ag Org N=10) 
              14. Establishment & employment requirements (capital, deposit,  
              years in practice, threshold sales, forced investment, &        
              nationality/residency requirements) N=77 (Ag Org N=10)          
                    Fundamental market reforms 15. Trading rights (ability to 
                                          import & export) N=77 (Ag Org N=10) 
                 16. Distribution rights (retail, wholesale and courier) N=78 
                                                                (Ag Org N=10) 
                 17. Subsidies (for Chinese firms or for export) N=78 (Ag Org 
                                                                        N=11) 

Appendix II
Questionnaire of U.S. Companies in China
(and U.S. Nonprofit Agricultural
Organizations) on China-WTO Issues

                  18. Operation of state-owned enterprises N=76 (Ag Org N=10) 
                 19. Price controls including dual and discriminatory pricing 
                                                           N=76 (Ag Org N=10) 
               20. Equal treatment (in taxation, access to funding, and under 
                                              Chinese law) N=76 (Ag Org N=10) 
                        Rule of law/Other 21. Consistent application of laws, 
              regulations, & practices (within & among national, provincial & 
                                             local levels) N=78 (Ag Org N=10) 
              22. Transparency of laws, regulations, & practices (publishing  
              and making publicly available) N=78 (Ag Org N=11)               
              23. Enforcement of contracts & judgments/Settlement of disputes 
                                   in Chinese court system N=77 (Ag Org N=11) 
                       24. Independence of judicial bodies N=77 (Ag Org N=10) 
                          25. Intellectual Property Rights N=76 (Ag Org N=10) 
                   26. China's application of safeguards against U.S. exports 
                  (antidumping and other legal actions against import surges) 
                                                           N=73 (Ag Org N=10) 

Q5b) Now that you've thought about the commitments, could you please tell
us which three are most important to your company (organization), in order
of importance? (Please review the list of commitments when answering this
question.)

a) Which is the most important? ________

b) Which is the second most important? _______

c) Which is the third most important? _______

Q6) Overall, based on your company's (organization's) experience, to what
extent

- if any - has China actually made reforms in the commitment areas that
are important to your company (organization)? Have they done so to a... N=
77

(Ag Org N=11)

1. [11 (3)] Great extent

2. [32 (2)] Moderate extent

3. [29 (4)] Some or little extent

4. [ 5 (1) ] No extent .............................................

5. [ (1) ] Don't know/No basis to judge

Follow up: Please explain your response.

Appendix II
Questionnaire of U.S. Companies in China
(and U.S. Nonprofit Agricultural
Organizations) on China-WTO Issues

Appendix II
Questionnaire of U.S. Companies in China
(and U.S. Nonprofit Agricultural
Organizations) on China-WTO Issues

           Rule of law/Other 21. Consistent                                   
        application of laws, regulations, &                             
        practices (within & among national, 13 (1) 13 (2) 37 (5) 13 (3) 3 (0)
        provincial & local levels) N=79 (Ag                             
                                  Org N=11)                             
                  22. Transparency of laws,                                   
                   regulations, & practices 12 (1) 11 (2) 33 (5) 17 (2) 6 (1)
            (publishing and making publicly                             
              available) N=79 (Ag Org N=11)                             
        23. Enforcement of contracts &                                        
        judgments/Settlement of disputes in 33 (5) 14 (2) 25 (1) 6 (2)  0 (0)
        Chinese court system N=78 (Ag Org                               
        N=10)                                                           
        24. Independence of judicial bodies                                   
                         N=79 (Ag Org N=10) 44 (6) 12 (2) 19 (2) 4 (0)  0 (0)
           25. Intellectual Property Rights                                   
                         N=80 (Ag Org N=10) 23 (7) 13 (2) 31 (1) 12 (0) 1 (0)
                 26. China's application of                                   
            safeguards against U.S. exports                             
               (antidumping and other legal 63 (8) 2 (1)  10 (0) 2 (0)  2 (0)
        actions against import surges) N=79                             
                               (Ag Org N=9)                             

Q8) Overall, what impact has China's implementation of its WTO commitments
had on your company's (organization's members) ability to do business in
China? N=80 (Ag Org N=11)

(Summarize the answers with the following prompt: Overall, would you say
that the impact has been....)

1. [10 (4)] Very positive

2. [44 (4)] Generally positive

3. [24 (1)] Little or no impact

4. [ 1 (2)] Generally negative

5. [ 1 ] Very negative .............................................

6. [ ] Don't know/No basis to judge

Follow-up: Does your company (organization) have any expectations about
the likely impact in two years' time?

Q9a) Is the United States Government doing anything on your behalf to
ensure that China's WTO commitments are implemented? N=55 (Ag Org N=11)

Follow-up: Is the USG doing anything on your behalf about IPR commitments?
N=57 (Ag Org N=9)

Appendix II
Questionnaire of U.S. Companies in China
(and U.S. Nonprofit Agricultural
Organizations) on China-WTO Issues

Q9b) How satisfied or dissatisfied are you with the United States
Government's efforts to ensure that China's WTO commitments are
implemented? N=80 (Ag Org N=11)

1. [ 6(4)] Very satisfied

2. [31(6)] Generally satisfied

3. [ 3(1)] As satisfied as dissatisfied

4. [ 5 ] Generally dissatisfied

5. [ 1 ] Very dissatisfied .............................................

6. [ 34 ] Don't know/No basis to judge

Follow-up (If applicable): How satisfied are you with the U.S.
Government's efforts to ensure that IPR commitments are implemented?

Q10) Has your company (Have your organization's members) contacted any
professional associations or government agencies in China or the United
States about any WTO issues?

[Note: We are not presenting the results to this question because we
changed the wording during questionnaire administration to account for
differences in how respondents interpreted the question.]

1. [ ] Yes

2. [ ] No GO TO QUESTION 11.

3. [ ] Not sure GO TO QUESTION 11.

Follow-up if the answer is "Yes." Which ones?

(Check off the boxes that correspond to the organizations.)

                            a. China's Ministry of     
                                   Commerce            
                          b. Other Chinese government  
                         agencies or officials (Please 
                                   specify)            
                            c. Provincial officials    
                                d. Consultants         
                          e. U.S. trade associations   
                          representing your company's  
                                   interests           
                                f. U.S. Embassy        
                         g. U.S. Trade Representative  
                             h. U.S. Department of     
                                  Agriculture          
                             i. U.S. Department of     
                                   Commerce            
                          j. U.S. Department of State  
                               k. U.S. Congress        
                          l. Other (Please specify):   

Follow up: 	Whom did you contact on which issues? What happened after you
contacted these organizations and/or agencies?

Appendix II
Questionnaire of U.S. Companies in China
(and U.S. Nonprofit Agricultural
Organizations) on China-WTO Issues

Q11) Some reform commitments have to be made by different levels of
government, such as the central government or the provincial or city
governments. Has your company (organization) experienced any differences
in how reforms have been implemented within and among national, provincial
and local levels of government?

Q12) Please tell me whether your company's (organization members')
activities in each of the following areas have increased, stayed about the
same, or decreased since China joined the WTO in December 2001. (Please
respond using the scale provided.)

                                              Stayed                No basis  
                                   Increased  about the  Decreased  to judge/ 
             1. Number of         (i) 56 (2)  same (ii) (iii) 2 (0) no answer 
             facilities in China              23 (1)                (iv) 1    
             N=82 (Ag Org N=9)                                      (6)       
             2. Value of total                                                
             investments in China   65 (0)     13 (1)      2 (0)      2 (8)
             N=82 (Ag Org N=9)                                      
             3. Number of                                                     
             employees in China     66 (4)      11(1)      4 (0)      1 (5)
             N=82 (Ag Org N=10)                                     
                     4. Number of                                             
                 employees in the   12 (0)     33 (3)     20 (1)     15 (6)
                U.S. N=80 (Ag Org                                   
                            N=10)                                   
             5. Scope of product                                              
             distribution in        55 (8)     17 (0)      0 (0)      9 (2)
             China N=81 (Ag Org                                     
             N=10)                                                  
             6. Number of                                                     
             products distributed   60 (7)     12 (1)      0 (0)     10 (3)
             in China N=82 (Ag                                      
             Org N=11)                                              
             7. Number of                                                     
             services provided in   51 (0)     22 (0)      0 (0)     9 (11)
             China N=82 (Ag Org                                     
             N=11)                                                  
                     8. Number of                                             
                    ventures with   23 (0)     29 (1)      4 (0)     26 (10)
                 Chinese partners                                   
               N=82 (Ag Org N=11)                                   
             9. Value of ventures                                             
             with Chinese           23 (0)     22 (1)      5 (0)     32 (9)
             partners N=82 (Ag                                      
             Org N=10)                                              
             10. Value of exports                                             
                to China N=82 (Ag   51 (8)      8 (2)      6 (0)     17 (0)
                        Org N=10)                                   
             11. Value of exports                                             
             from China N=82 (Ag    38 (2)     15 (0)      1 (0)     28 (9)
             Org N=11)                                              
                    12. Volume of                                             
              production in China   59 (0)      3 (1)      1 (0)     19 (10)
               N=82 (Ag Org N=11)                                   
              13. Company revenue                                             
              stream N=82 (Ag Org   72 (4)      4 (2)      2 (0)      4 (4)
                            N=10)                                   

Q13) Is there anything else you would like to tell us regarding China's
joining the WTO, and its implementation of its WTO commitments?

Thank you for your participation and help!

Appendix III

Profile of U.S. Investment and Trade with China

U.S. investment and trade with China have grown significantly over the
past decade. As a result of significant new investments from Hong Kong,
the United States, Japan, and Taiwan; China surpassed the United States as
the world's largest recipient of foreign direct investment flows in 2002.
However, China still represents a very small share of the total stock of
U.S. investments worldwide. In terms of trade in goods and services, China
is the United States' fourth largest trading partner, after Canada,
Mexico, and Japan. Both U.S. exports to China and imports from China have
risen rapidly over the past decade. However, the United States imports
significantly more from China than it exports to China, resulting in a
U.S. bilateral trade (goods and services) deficit with China of $102
billion in 2002, according to U.S. trade statistics.1

U.S. Investment in China

As of the end of 2002, U.S. companies had a total stock of direct
investments in China of $10.3 billion-more than 10 times the approximately
$900 million invested a decade earlier in 1993. However, compared to the
$1.5 trillion of accumulated U.S. direct investments worldwide, China
accounts for less than 1 percent of total U.S. investment.2 In terms of
new investment inflows, though, China receives significant investments
from several countries, in addition to the United States. In 2002,
according to Chinese statistics, nearly $53 billion in foreign direct
investment flowed into China, making it the world's top investment
destination (rather than the United States) for the first time.3 Hong Kong
was by far the largest supplier of foreign direct investment to China,
with

1The U.S. bilateral goods deficit continued to grow in 2003, reaching
about $125 billion. However, data on U.S. bilateral services with China
were not yet available for 2003.

2Foreign direct investment statistics for the United States, unless
otherwise noted, are from the Bureau of Economic Analysis (BEA), Survey of
Current Business (Washington, D.C.: BEA, Sept. 2003). BEA defines U.S.
direct investment abroad as the ownership or control, directly or
indirectly, by one U.S. resident of 10 percent or more of the voting
securities of an incorporated foreign business enterprise or the
equivalent interest in an unincorporated foreign business enterprise.

3In past years, the United States has been the top recipient. Initial
reports for 2003 indicate that the United States was again the top
destination, though these are preliminary statistics. We did not
independently assess the reliability of Chinese foreign direct investment
data. We report these statistics here solely to provide background on U.S.
trade and investment with China and not as a basis for any findings or
recommendations.

Appendix III
Profile of U.S. Investment and Trade with
China

about 34 percent of the total, followed by the United States (over 10
percent), Japan (8 percent), and Taiwan (about 8 percent).4

U.S. direct investment in China has largely focused on manufacturing
sectors, particularly computer and electronic products and chemicals.
Mining has also been a significant area of U.S. investment. Figure 8 shows
the distribution of the stock of U.S. direct investment in China as of
2002.

Figure 8: Stock of U.S. Direct Investment in China, 2002 ($10 billion)

Notes:

Investment in this figure is U.S. direct investment position abroad on a
historical-cost basis.

The U.S. Bureau of Economic Analysis has modified its industry
classifications used for U.S. direct investment abroad since GAO's
September 2002 report, GAO-02-1056. Therefore, a direct comparison between
the statistics on U.S. investment abroad by industry presented in that
report and the information provided in this figure cannot be made.

4See Congressional Research Service, China's Economic Conditions, Issue
Brief IB98014 (Washington, D.C.: Jan. 23, 2004). Figures cited are based
on Chinese government statistics.

Appendix III
Profile of U.S. Investment and Trade with
China

The industry classifications used in this figure do not correspond
directly with the industry classification used in our questionnaire. For
example, our questionnaire included firms classified as agriculture.
However, these firms may have investments in China in wholesale trade (of
agricultural products) and manufacturing (of fertilizers, processed foods,
or other agriculturally related products). In addition, because of the
limited number of responses that we received, the companies that did
respond to our questionnaire in each area do not constitute a
representative sample of their overall industry group.

The pattern of U.S. investment in China, however, differs from the
worldwide pattern of U.S. investment. Figure 9 shows that manufacturing
accounts for about 26 percent of U.S. investments worldwide compared with
about 60 percent of investments in China (fig. 8). Similarly, globally the
United States has about one third (33 percent) of the stock of its
investments in other industries (e.g., agriculture, construction, retail
trade, and transportation and warehousing) compared with about 10 percent
of its investments in China in the other industries category. Finance and
depository institutions (except insurance) is the third largest area of
U.S. global investments, accounting for about 20 percent in 2002, while in
China, only about 3 percent of U.S. investments are in this area. This
difference in the pattern of U.S. investment in China compared to global
patterns is not surprising, because China is a developing country, has an
abundant supply of relatively low-cost labor, and is a growing producer of
manufactured goods worldwide. In contrast, the European Union, Canada, and
Japan, which accounted for well over half of the stock of U.S. direct
investment abroad, are developed countries with economies similar to the
United States.

                                  Appendix III
                   Profile of U.S. Investment and Trade with
                                     China

Figure 9: Stock of U.S. Direct Investment Worldwide, 2002 ($1.5 trillion)

Notes:

Investment in this figure is U.S. direct investment position abroad on a
historical-cost basis.

The U.S. Bureau of Economic Analysis has modified its industry
classifications used for U.S. direct investment abroad since GAO's
September 2002 report, GAO-02-1056. Therefore, a direct comparison between
the statistics on U.S. investment abroad by industry presented in that
report and the information provided in this figure cannot be made.

The industry classifications used in this figure do not correspond
directly with the industry classification used in our questionnaire. For
example, our questionnaire included firms classified as agriculture.
However, these firms may have investments in China in wholesale trade (of
agricultural products) and manufacturing (of fertilizers, processed foods,
or other agriculturally related products). In addition, because of the
limited number of responses that we received, the companies that did
respond to our questionnaire in each area do not constitute a
representative sample of their overall industry group.

U.S. Trade with China	U.S. trade in goods and services with China has also
grown significantly during the past decade. From 1993 to 2002, U.S.
exports to China grew at an average annual rate of 12 percent, compared
with 5 percent for U.S. exports worldwide during the same time period.
Similarly, U.S. imports from China grew at an average annual rate of 17
percent, while overall U.S. imports grew at 8 percent annually.
Consequently, China was the U.S.'s fourth largest trading partner in 2002
(after Canada, Mexico, and Japan),

Appendix III
Profile of U.S. Investment and Trade with
China

with about $27 billion in U.S. exports (goods and services) and about $129
billion in U.S. imports from China (goods and services). In 2003, goods
trade data show that this rapid growth continued, with U.S. exports to
China at about $27 billion, an increase of 30 percent from 2002.
Similarly, U.S. imports from China in 2003 were about $152 billion, an
increase of 21 percent from 2002. Services trade data for 2003 were not
available as of the date of this report.5

As a result of the difference between U.S. exports and imports, the United
States has had a growing bilateral trade deficit with China. In 2002, the
U.S. bilateral trade deficit with China reached $102 billion, the largest
with any country. The deficit resulted from the $104 billion difference in
goods trade (as opposed to services trade). The United States maintained
about a $2 billion surplus in services trade with China in 2002.

In 2003, the U.S. bilateral goods trade deficit with China expanded
further, to about $125 billion, an increase of about $21 billion. The
increase was primarily due to an increase in the trade deficit in
computers, electrical equipment, and appliances, as well as smaller
increases in textiles, apparel, and leather; metal and machinery (except
electric) products; and miscellaneous manufactured components, including
furniture. However, the U.S. bilateral trade surplus with China in
agriculture, food and tobacco products, and minerals rose from about $260
million in 2002 to about $2.8 billion in 2003. Figure 10 shows U.S.
exports and imports of goods by broad industry category in 2003.

5The U.S. Bureau of Economic Analysis publishes private services trade
data by country annually (for the previous year) in the October issue of
the Survey of Current Business.

                                  Appendix III
                   Profile of U.S. Investment and Trade with
                                     China

Notes:

Exports are domestic exports valued at free-alongside-ship (FAS) value.
Imports are imports for consumption at customs value. Categories are based
on the North American Industry Classification System (NAICS).

The industry classifications used in this figure do not correspond
directly with the industry classification used in our questionnaire. For
example, our questionnaire included firms classified as agriculture.
However, these firms may have investments in China in wholesale trade (of
agricultural products) and manufacturing (of fertilizers, processed foods,
or other agriculturally related products). In addition, because of the
limited number of responses that we received, the companies that did
respond to our questionnaire in each area do not constitute a
representative sample of their overall industry group.

In terms of U.S. goods exports, China ranks sixth after Canada, Mexico,
Japan, the United Kingdom, and Germany. Top U.S. goods exports to China in
2003 included: computers, electrical equipment, and appliances (23
percent); agriculture, food and tobacco products, and minerals (20
percent); metal and machinery (except electrical) products (16 percent);
petroleum and chemical products (16 percent); and transportation equipment
(12 percent). U.S. goods exports to China increased by 30 percent from
2002 to 2003, compared to an increase of 3 percent for U.S.

Appendix III
Profile of U.S. Investment and Trade with
China

goods exports worldwide during the same period. Figure 11 shows the
relative share of broad industry groups in U.S. exports to China in 2003.

Notes:

Exports are domestic exports valued at free-alongside-ship (FAS) value.
Categories are based on NAICS.

The industry classifications used in this figure do not correspond
directly with the industry classification used in our questionnaire. For
example, our questionnaire included firms classified as agriculture.
However, these firms may have investments in China in wholesale trade (of
agricultural products) and manufacturing (of fertilizers, processed foods,
or other agriculturally related products). In addition, because of the
limited number of responses that we received, the companies that did
respond to our questionnaire in each area do not constitute a
representative sample of their overall industry group.

In terms of U.S. imports of goods, China is the second largest foreign
supplier to the U.S. market after Canada and ahead of Mexico. Top U.S.
goods imports from China in 2003 also included computers, electrical
equipment, and appliances (36 percent). As previously noted, U.S. direct

Appendix III
Profile of U.S. Investment and Trade with
China

investment in China was relatively large in the computer and electronic
products area. A share of trade in this area between the United States and
China is likely to be intracompany trade, in which components are produced
in one country and exported to the other country. The components are then
used to produce final goods that are ultimately sold in each market, as
well as other countries. Other important imports included miscellaneous
manufactured components, including furniture (21 percent) and textiles,
apparel, and leather (19 percent). Figure 12 shows the relative share of
broad industry groups in U.S. imports from China in 2003.

Notes:

Imports are imports for consumption at customs value. Categories are based
on NAICS.

The industry classifications used in this figure do not correspond
directly with the industry classification used in our questionnaire. For
example, our questionnaire included firms classified as agriculture.
However, these firms may have investments in China in wholesale trade (of
agricultural products) and manufacturing (of fertilizers, processed foods,
or other agriculturally related products). In addition,

Appendix III
Profile of U.S. Investment and Trade with
China

because of the limited number of responses that we received, the companies
that did respond to our questionnaire in each area do not constitute a
representative sample of their overall industry group.

Services trade with China is less significant to the United States
relative to services trade with other partners. Unlike goods trade, China
is not in the top 10 importers or exporters of services trade with the
United States. In 2002, the United States exported about $6 billion worth
of services to China, compared with about $280 billion in exports
worldwide.6 Other private services (such as education, insurance,
telecommunications, and business, professional, and technical services)
generated $2.6 billion in sales, followed by other transportation such as
freight charges from transportation of goods by ocean, air, or land, and
port charges ($1.4 billion). The United States imported about $4 billion
in services from China in 2002, compared with about $205 billion
worldwide. Top U.S. imports of services from China included other
transportation ($2.3 billion) and travel services ($1.1 billion). Figure
13 shows the value of U.S. services exports and imports with China in 2002
by category.

6Data on U.S. bilateral services with China were not available for 2003.
The U.S. Bureau of Economic Analysis publishes private services trade data
by country annually (for the previous year) in the October issue of the
Survey of Current Business.

                                  Appendix III
                   Profile of U.S. Investment and Trade with
                                     China

Note: The industry classifications used in this figure do not correspond
directly to the industry classification used in our questionnaire. For
example, our questionnaire included firms also classified as financial
services. However, these firms may or may not provide cross-border
financial services (as opposed to providing financial services to China
from their operations in China). In addition, because of the limited
number of responses that we received, the companies that did respond to
our questionnaire in each area do not constitute a representative sample
of their overall industry group.

Sources and Methods	In order to provide background on U.S. investment and
trade with China, we collected and analyzed the most recently available
direct investment abroad and cross-border private services trade data from
the Bureau of Economic Analysis (BEA) as well as goods trade data from the
Bureau of the Census. We collected the most recently available Census
trade data through the U.S. International Trade Commission's Dataweb. We
also collected information on worldwide investment in China from reports
from the Organization for Economic Cooperation and Development and the
Congressional Research Service (based on Chinese government data

Appendix III
Profile of U.S. Investment and Trade with
China

sources). Since these data are used solely in this appendix as background
information to the report, we did not assess the reliability of these
data. For more information on BEA's methodology for collecting U.S. direct
investment abroad data, see "U.S. Direct Investment Abroad" in the
September 2003 issue of the Survey of Current Business and "U.S. Direct
Investment Abroad: 1994 Benchmark Survey, Final Results" located at BEA's
Web site at www.bea.gov. For more information on BEA's methodology for
collecting U.S. international services data, see "U.S. International
Services" in the October 2003 issue of the Survey of Current Business also
available at BEA's Web site.

The industry categories that BEA and Census use do not correspond to the
industry classifications used in our questionnaire. Because of this, and
because the number of firms that responded to our questionnaire are not
representative of all companies in China nor of all U.S. companies in
China from these industries, these responses are not representative of the
industry groups used in this profile of U.S. investment and trade with
China. In addition, the industry categories used by BEA and Census have
changed since our 2002 report.7 Therefore, the figures in this report and
our prior GAO report are not comparable. In order to present broader
industry groups, we combined some Census data categories. These groupings
are presented in table 5. Census goods trade categories are based on the
North American Industry Classification System (NAICS). We collected these
data at the three-digit level of aggregation and combined product
categories into broader groups. These NAICS codes are listed in table 5.
For services trade data from BEA, we separated the category "financial
services" from the broader category of "other services."

7GAO-02-1056.

                                  Appendix III
                   Profile of U.S. Investment and Trade with
                                     China

      Table 5: List of GAO Industry Groupings from Census Goods Trade Data

NAICS 3-digit GAO industry group NAICS industry category code

Agriculture, food and tobacco products, and minerals Agricultural products

Livestock and livestock products

Forestry products (not elsewhere specified)

Fish, fresh, chilled, or frozen, and other marine products 114
Oil and gas 211

Minerals and ores

Food manufacturing

Beverages and tobacco products

Textiles, apparel, and leather Textiles and fabrics

Textile mill products

Apparel and accessories

Leather and allied products

Wood, paper, and printing Wood products

Paper

Printing, publishing, and similar products

Petroleum and chemical products Petroleum and coal products

Chemicals

Plastics and rubber products 326

Nonmetallic mineral products 327

Metal and machinery (except electric) products Primary metal manufacturing
331

Fabricated metal products (not elsewhere specified) 332

Machinery, except electrical 333

Computers, electrical equipment, and appliances Computer and electronic
products 334

Electrical equipment, appliances, and components 335

Transportation equipment Transportation equipment 336

Miscellaneous manufactured components, including Furniture and fixtures
337
furniture

Miscellaneous manufactured commodities 339

Miscellaneous goods Waste and scrap 910

Public administration 920

Goods returned to Canada or re-imported to the United 980
States

Special classification provisions (not elsewhere specified) 990

Source: GAO.

Appendix IV

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	Adam Cowles (202) 512-9637 Michelle Sager (202) 512-2712

Staff 	In addition to those named above, Martin de Alteriis, Shakira
Edwards, Victoria Lin, Rona Mendelsohn, Beverly Ross, and Timothy Wedding
made

Acknowledgments key contributions to this report.

Related GAO Products

World Trade Organization: Ensuring China's Compliance Requires a Sustained
and Multifaceted Approach. Washington, D.C.: GAO-04-172T, October 30,
2003.

GAO's Electronic Database of China's World Trade Organization Commitments.
Washington, D.C.: GAO-03-797R, June 13, 2003.

World Trade Organization: First-Year U.S. Efforts to Monitor China's
Compliance. Washington, D.C.: GAO-03-461, March 31, 2003.

World Trade Organization: Analysis of China's Commitments to Other
Members. Washington, D.C.: GAO-03-4, October 3, 2002.

World Trade Organization: Selected U.S. Company Views about China's
Membership. Washington, D.C.: GAO-02-1056, September 23, 2002.

World Trade Organization: Observations on China's Rule of Law Reforms.
Washington, D.C.: GAO-02-812T, June 6, 2002.

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